Lending in the Rain? The Impacts of Natural Hazard Shocks on Banks and the Finance-Resilience Nexus: A Review

Natural hazard shocks have significant negative impacts on economic activity. This paper reviews the recent empirical literature on how banks are impacted by such shocks, and how banks mediate the economic consequences for households and the real economy. After conceptualizing the theoretical transmission channels between the real economy and the banking sector, the review proceeds in two steps. First, the existing literature on the direct effects of natural hazard shocks on bank stability, profitability, and credit supply is synthesized. Then, the critical role of banking in economic recovery is dissected, including research on spillovers into unaffected regions through banks. Negative direct impacts of natural hazard shocks on banks can be significant but are in many cases transitory. Banking systems in less-developed countries appear more vulnerable and are less able to maintain credit supply under adverse conditions. Banks that are better capitalized and that have incentives to support affected economies contribute to economic resilience. Important research gaps remain to determine specific characteristics and policy levers that enable the banking system to contribute to a resilient economy.